Sunday, December 23, 2012

Published in The Tennessean, Sunday, December 23, 2012 and atFORBES with archives.by Richard J. Grant
November 2012 was an expensive month for Americans in more ways than one. In simple fiscal terms, the U.S. government spent $333.8 billion last month. Half of that was borrowed (government receipts were only $161.7 billion), but November was not an average month. Nevertheless, it was consistent with the bias toward rising government outlays.

The 2012 fiscal year, which ended in September, ran up a deficit of just over $1 trillion. That was not quite a third of the $3.5 trillion that the federal government spent last year. The 2011 fiscal year had a proportionately higher deficit and, at just over $3.6 trillion, the highest level of spending in history. When adjusted for inflation, it roughly ties 2009 for the highest level of real spending.

The extraordinary 18-percent leap in government spending during 2009 was due in part to the addition of new “stimulus” funding as well as spending increases (some of which were automatic) in response to the recession. The $830 billion stimulus package (known formally, if not descriptively, as the American Recovery and Reinvestment Act of 2009) added the equivalent of an extra 3 months’ worth of 2008-level spending spread over the next few years.

The past four years stand out as those with the highest inflation-adjusted spending levels by far. That is in dollar terms, but...

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.comFollow on Twitter @richardjgrant1

Sunday, December 09, 2012

As a society advances, the ability to provide a “safety net” for those who have suffered some type of misfortune increases. But, perhaps paradoxically, that very advancement should also reduce the perceived need for such a safety net.

Advanced societies, which necessarily have relatively well-developed property rights and legal systems, are characterized by rising levels of productivity and income. Over time, the proportion of the population living in poverty, as measured by some objective and absolute standard, should be declining. If that is not the case, or is no longer the case, then it is a sure sign that the protection of property rights is in retreat.

Certainly, as our standards of living rise, our perceptions of what constitutes poverty might also rise. This is why various Western governments currently define poverty relative to some average income and can include families that possess automobiles, color TVs, and air-conditioned homes. Today we grant welfare assistance to families that only a few decades earlier would have been perceived as relatively well-off.

Charity presupposes wealth, and charity best benefits its recipients when thoughtfully provided in a manner that encourages the best characteristics in its beneficiaries. This is why government welfare programs tend to be very poor substitutes for private charity, especially when the funding comes from the more-distant federal level. Further, an entitlement structure creates perverse economic incentives, and political incentives generally cause such programs to expand to unmanageable levels.

Where once people were both encouraged and expected to grow out of poverty and dependency, our “safety net” programs have grown their own constituencies that lobby for their growth and perpetuation. Where once government-run schools were seen as a means to provide the children of indigent families with education and vocational training (as well as to assimilate immigrant families), such tax-funded schools soon became the norm, with many people unable to remember or imagine alternatives.

Just as businesses have great difficulty competing with government-sponsored enterprises that they are taxed to support, the private development and provision of education and training services is also hampered by regulations and tax levies that favor government school systems. With the lure of tax money, government programs tend to create their own ecosystems of politicized constituencies. The coerced nature of tax funding enables those constituencies, not only to crowd out the alternatives of natural society, but also to persist long past any need justified on welfare grounds.

Government-run school systems have run their course from the local control of earlier times to today’s increasingly centralized, politically correct leviathans that give less value for the time of their students and the dollars of their taxpayers than do private competitors. The drain on private resources reduces choice and causes homeschoolers and private-schooled families to pay twice for education. It also traps the children of most lower-income families in an inferior system from which they and their parents would dearly love to escape. The demand for places in charter schools and even in magnet schools attests to this.

The problems inherent in tax-funded schools can be alleviated by greater school choice. If the most important purpose of tax-funded schooling is to assist the indigent, it does not follow that governments should also run the schools. We know that charter schools and private independent schools generally offer better service and will correct their own problems quickly and without politicized battles.

It is disingenuous to argue against the extension of school choice through charter schools and vouchers on the grounds that such schools will not instantly come into existence or that not all areas will be equally served. First we must have the choice. Only then will we be free to innovate and to discover what works best.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

Sunday, December 02, 2012

The only politicians who are serious about limiting taxes are those who are serious about limiting government spending. Any vote for spending increases is a vote for increased taxes to be paid either now or in the future.

Much of the perceived tax burden can be shifted into the future by deficit spending, which means increased government borrowing. By shifting the perceived burden onto future taxpayers, politicians make their current government spending appear to be less burdensome than it actually is. This illusion is compounded by the belief of many voters that someone else is also bearing the direct cost of current taxes.

Where once there was a stigma against indebtedness, especially to excess, this has broken down over the past century. Politicians, recognizing the value of spending to their reelection chances, welcomed any theory that could be used to justify government borrowing. This helps explain the rapid rise in popularity early in the 20th century of Keynesian theories, which appeared to justify deficit spending at least in times of recession. But once the stigma broke down, budget deficits became common even during good times.

During the past four years, the national debt has increased by more than $1 trillion each year. The total debt has now surpassed $16.3 trillion, which is more than six times greater than annual federal tax revenues. “Stimulus” spending came and never went away. Entitlements continue to grow. The trust funds of both Social Security and Medicare are shrinking, and the reduction in FICA tax rates further depletes Social Security and speeds its transition from mock retirement fund to de facto welfare scheme.

As long as we continue to raise the federal debt ceiling, as we will soon be asked to do, we will perpetuate the illusion that government spending is a low-cost way to fulfill our desires. But as government spending grows, it becomes an increasingly worse deal. As the debt grows, it becomes more expensive to service and increasingly difficult to maintain our AAA rating. As the Federal Reserve continues to monetize half of our annual budget deficit, the dollar will continue to decline in value and the risk of rapidly rising interest rates will increase.

None of this was ameliorated by the recent national election, which left us with a split Congress and a big spender in the White House. Worse, that big spender is also a big regulator. While everyone is in a tizzy over what they call “The Fiscal Cliff,” the prospect of unrelenting regulatory interventions puts us on a permanently lower growth path and weakens our ability to raise the revenues necessary to cover the costs of ambitious government.

In this bigger context, the fiscal cliff is more of a molehill. It consists of the “sequester,” which would reduce future spending increases by about $110 billion per year over nine years, and a more significant set of automatically increased tax rates on incomes, capital gains, and dividends.

Anticipation of at least some higher tax rates has already resulted in income shifting that will, ironically, result in higher tax revenues this year but a relative dearth after higher tax rates come into effect. The sequester would have a barely perceptible effect on government spending except that it will fall disproportionately on defense, which is less than 20 percent of the budget.

A more serious approach to budget control was demonstrated by Sen. Rand Paul, R-Ky., who, on entering the Senate two years ago, introduced a well-crafted bill that would cut $500 billion from the budget over one year. His bill was constitutionally sensitive and therefore friendlier to defense than to the federal departments of Energy and Education. But the admirable feature is that the cuts would occur right now, not at some vague future date.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

Sunday, November 11, 2012

I am less afraid of hurricanes than I am of voters. Luckily I
live in a place where the danger from either is limited. That is a roundabout
way of saying that I live in an inland “red state” where my neighbors have
refrained from voting to tax my employment income, do not require me to join
any trade union, and do trust me to carry a handgun.

When a hurricane struck the Northeast, my family and I were
not directly affected. But when voters in the Northeast went to the polls, we
were affected. That is not to suggest that anyone in my state would begrudge
the use of federal funds to provide emergency assistance, though they might
believe that state and local governments are much better suited for the
planning and delivery of such emergency services. They might also question the
wisdom of cycling the funds through Washington, DC.

My state is also the source of volunteers, people who have
contributed not only their private funds, but also their time and presence to
give direct emergency assistance. If anything is begrudged, it is the passage
by voters (through their representatives) of laws and regulations that make it
more difficult to render assistance as they make it more difficult to live.

Life is made more difficult when voters shift powers and
resources away from the local and state levels up to the federal level. For
most of what we do, central planning is an extremely poor substitute for the
individual planning and free association of private individuals. Federal
regulations and the excessive taxes needed to pay for federal transfer programs
(especially those of questionable constitutionality) are just another layer of
insult heaped upon our more modest local errors.

Foolish editorialists suggested that the response to
Hurricane Sandy demonstrated the efficacy of big government. But more sober
reflection suggests the opposite. Those countries where people are least able
to respond to natural disasters are Third World countries, which are
characterized by the lowest levels of economic freedom. A Third World
government is one that invariably overburdens its people with tax and regulatory
restrictions on commerce, with the possibility of waivers purchased on the
side. The result is poverty.

On economic freedom, most voters seem not to care that the
United States no longer leads the world. They seem unaware of the link between
their votes and four years of economic stagnation. They seem to believe that
big government saved them from an even greater financial crisis, apparently
unaware that the financial industry, along with the health-care industry, were already
among the most heavily regulated in America.

Under these burdens, we are less able to help the people of
the Northeast, just as they are less able to help themselves. Entrepreneurs
would find a way to deliver gasoline and generators from other parts of the
country, but they would risk prosecution for “price gouging” by the state attorney
general were they to charge a price sufficiently high to cover the extra costs
of the special shipments. So entrepreneurs stand down and the people of the
Northeast wait in gas lines.

The faux morality of anti-gouging laws does not cause
hurricanes, but it does exacerbate shortages and the resultant suffering. A
state's disaster preparedness should include the repeal of such hindrances as
anti-gouging laws – even in my red state.

Sunday, October 28, 2012

Many viewers of the final presidential debate between Pres. Barack Obama and Gov. Mitt Romney were expecting, if not hoping for, a climactic fight to the finish. What we witnessed appeared more as a one-sided demonstration of self-restraint and unexpected mercy in the face of vigorous though ultimately ineffective attacks.

The Obama campaign had telegraphed its intention to define Romney as a warmonger, but when Obama tried to stamp the label on him, the president found himself punching air. Romney saw him coming. At times it appeared as if the president was shooting at his own reflection in the mirror.

Romney fans might have been disappointed that their man did not go for the kill. If so, they missed the point. He was choosing his terrain and his battles. By showing agreement with the president when warranted, or when inexpensive, Romney neutralized issues that would yield little advantage to him. He seemed to know that the last thing we would want to see in a commander-in-chief is someone who would lead us into the enemy’s killing zone.

Romney has accepted the 2014 deadline for our departure from Afghanistan. He recognizes the deadline as part of a plan that he will inherit, and that to change it would cause disruption of the military plans now in place. He knows that, short of an armistice, a strategic withdrawal is better executed the less an enemy knows about its timing. But the timing is already known, so work with it and concentrate on other variables.

Romney’s blocking of expected approaches enabled him repeatedly to channel his foe away from foreign policy and back to the president’s area of greatest weakness, the economy. Compared to the president’s record and stated intentions, Romney’s economic plan is superior along all major dimensions: a simpler, less-burdensome tax structure; energy friendliness; elimination of “ObamaCare;” the reduction of regulatory burdens; a more credible approach to deficit reduction; and the end of quantitative easing that now threatens the dollar.

To declare China a currency manipulator cannot be seen as wise from an economic analyst’s perspective, but it could serve as an opening gambit to higher-stakes negotiations. Currency weakness is China’s problem only because it is our problem. While they would naturally prefer to have exchange-rate stability with their major trading partners, our weak dollar policy threatens them with price inflation unless they let their currency rise.

Now, especially with the prospect of a Romney victory, Chinese leaders have greater incentive to let their currency fluctuate with apparent freedom. What the Chinese really need, if they wish the full benefits of peaceful trade, is greater respect for private property rights.

Not even a libertarian president, which neither candidate promises to be, would get us where we need to go in the next four years without the requisite political skills and support. A dispassionate analysis requires us to recognize that effective political solutions are not made-to-order for individual preferences, but rather served up as a stewlike mixture intended to be good enough for a large market.

Romney’s plan and the philosophy it reflects offer us the greater hope for future peace and prosperity. His varied approach to each of the three debates, as much as his demonstrated command of the issues and details, showed the necessary insight and strategic sense to temper those policies that might not fit future situations.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

Sunday, October 14, 2012

If we wish to have our federal government continue to spend 23 percent of the gross domestic product (closer to 40 percent if we count state and local spending), then we and our descendants must eventually be willing to pay roughly 23 percent of our incomes in taxes.

There is a limit to our borrowing capacity, and if we continue to cover 40 percent of the federal budget with borrowed money, we will soon experience that limit. The only way out is to ensure our economy grows significantly faster than government spending.

We cannot expect to achieve this by raising tax rates, unless those who bear the burden of these higher taxes do so cheerfully. Starting from relatively low rates of taxation, this is conceivable. But as tax rates rise, and more income is transferred from its private creators to those who will administer its disbursement, our productive potential will decline. Neither of these trends has been shown to foster cheerfulness.

It is not just the payment of taxes that limits our growth potential. There is no point in discussing tax policy without considering the purpose of the tax, the amount of revenue needed, and how that revenue will be spent. The purpose might not even be to raise revenue but rather to discourage some activity deemed socially undesirable, such as smoking. But our current discussions largely revolve around the size and persistence of the national budget deficit, the excess of government spending above tax revenue.

Sunday, September 30, 2012

by Richard J. GrantTo summarize the economic performances of American presidents,
a well-known economic adviser once remarked, “I like principled conservatives
and unprincipled liberals.” This, by way of introducing former president Bill
Clinton who, in his recent convention speech, is widely believed to have boosted
the reelection chances of President Barack Obama. But Clinton's greatest gift
to Obama was placed under the tree almost 20 years ago.Clinton recognized the untapped potential in some Carter-era
legislation, the Community Reinvestment Act (CRA), which would give his
administration leverage over financial institutions to increase loans to
members of key voting blocs despite their relatively poor credit ratings. The
subprime market had always existed because the higher risks were balanced by
higher fees and interest rates, but the CRA pressured banks to increase loans
and to hold down fees. From the early 1990s, the dollar amount of CRA loans
began a steep decade-long climb.

The Federal Reserve is one of the agencies that oversee CRA
compliance. It describes the CRA as “intended to encourage depository
institutions to help meet the credit needs of the communities in which they
operate, including low- and moderate-income neighborhoods, consistent with safe
and sound operations.” The theory must be that without the CRA, entrepreneurs
wouldn't know what to do. Apparently someone from Washington must tell them
that their role is to serve customers.

The real effect of the CRA was to give arbitrary regulatory
powers to federal agencies and to give shakedown powers to any community group
that could threaten to bring a complaint against a target bank. This alone
would be sufficient to tag the legislation as immoral, but it also coerced
banks to direct scarce resources into risky uses and away from more productive
uses. When combined with Federal Housing Administration guarantees and easy
money from the Federal Reserve, mortgage lenders were induced to lower their
standards in a moral surrender that spread beyond the subprime market.

As long as real estate prices continued to rise, troubled
homeowners could avoid default on their mortgages by selling their properties
to cover the loan obligations. The real estate boom was fueled not only by the
CRA but also by favorable tax treatment and by the Fed's active lowering of
interest rates. The end result of such policy-induced booms is always a bust;
the only question is when it will break and how sharply.

The answer in this case came near the end of President George
W. Bush's administration. The CRA remained in place throughout the Bush
administration, which reaped whatever electoral advantages it offered. But they
also reaped the reputational destruction that comes with being in office when a
crash breaks.

They were not innocent – they aggressively promoted home ownership
– though, in fairness, President Bush did eventually try to restrict the
lending of Fannie Mae and Freddie Mac only to be rebuffed by a hostile
Congress.

Thus was Clinton’s unintended gift delivered. The timing of
the crash was Obama's good luck.

The CRA remains in place and is actively exploited by the
Obama administration. The Federal Reserve continues to compensate for Obama's
poor fiscal and regulatory performance with repeated rounds of quantitative
easing to prop up mortgage and home values. But there is no boom: GDP growth
approaches 1 percent, business startups are down, and median income is down,
all because our governmental burdens continue to grow.

Sunday, September 16, 2012

From a political perspective, the best time for a new
president to take office is either during or immediately after a recession.
Given the pattern of political and business interaction over the past century,
any new president is likely to inherit the politically induced economic
imbalances bequeathed by previous presidents and congresses. Recessions are the
painful but necessary corrections of those imbalances, when businesses readjust
their production, processes, and workforces to better fit the demand for their
products.

In this, the Obama administration has two reasons to be
thankful for their inheritance. Although Democrats already controlled the
Congress in 2008, their opponents’ party held the White House when the
recession hit. That eased their way to power and they entered office with the
economy in the process of cleaning itself out. All they had to do was to let businesses
sort themselves out, let the legal system do its job, and to wind down the
bailout programs implemented by their predecessor.

But, as we know, they didn't do that. Instead, they added
more money and their own politically inspired micromanagement of the bailouts
and “stimulus” programs. The February 2009 stimulus package added more than
$700 billion to a budget that was already in deficit. While it might have made
life easier for a few mayors and governors, it saddled each American with an increase
of more than $2000 as their share of new public debt. This was followed by the
passage of two Leviathan-sized regulatory bills: one that pulled more of the
healthcare and insurance industries under federal control, and another that
further centralized federal control over the financial industry.

Sunday, September 02, 2012

A politician who leads with compromise is like a prize
fighter who leads with his chin. If you're in a real fight, you're not going to
last long.

Some months ago, “compromise” was one of most popular words
in political discourse. But the calls for compromise were suspiciously
unidirectional. We were treated to portrayals of President Ronald Reagan as
“the great compromiser” who, despite his professed intention to reduce marginal
tax rates, actually “raised taxes 11 times.” Clearly this was a call to
conservatives and Republicans, in the name of a man for whom they had great
respect, to follow his example and compromise with those who wish to raise tax
rates, perhaps in return for spending cuts, in order to reduce the budget
deficit.

But should Reagan be remembered as a great compromiser? It
is unlikely that the striking air traffic controllers or the Soviets would
agree. The art of principled compromise entails
giving up a lesser value to achieve a greater value. The strikers and the
Soviets asked Reagan to do the opposite; they ended with nothing.

Sunday, August 19, 2012

President Barack Obama is apparently something of a contrarian investor: He
likes to invest against the market consensus.

Unfortunately for us, however, he tends to bring a somewhat regal attitude
to his work and, when “investing” our money, has exhibited a reverse Midas
touch. In this, he has already distinguished himself from his chief rival for
the presidency, Gov. Mitt Romney.

Perhaps it is not a fair comparison. Government
is not a business and cannot be run as if it were. But what the president needs
to ...keep reading

Sunday, August 12, 2012

by Richard J. GrantYou don't have to pay federal income tax. There are several
ways legally to avoid paying, but the catch is that they all entail doing
things differently than you would have in the absence of such a tax.When, during an election campaign, a candidate
is accused of not having paid income taxes during some past period, the only
relevant question is whether ... keep reading

Sunday, August 05, 2012

President
Barack Obama’s recent “you didn’t build that” monologue continues to trouble
many people, and for good reason. Although the obvious political purpose of the
speech was to diminish the past achievements of his electoral rival, Gov. Mitt
Romney, the president managed to insult and diminish not only the achievements,
but also the aspirations, of millions of other Americans.

Sunday, July 29, 2012

It is often said in philosophy-of-science
discussions that “if it explains everything, it explains nothing.” This reminds
us of the most-used word to explain everything economic: “greed.” As British
Chancellor of the Exchequer George Osborne described allegations of
interest-rate index manipulation, “Through 2005, 2006 and early 2007 we see
evidence of systematic greed at the expense of financial integrity and
stability.”

We note in passing that the dates mentioned are conveniently
before the current chancellor assumed office in 2010, but we are still waiting
for any solid evidence that whatever actions the bankers took to manipulate the
London Interbank Offered Rate (LIBOR) had more than a microscopic effect on the
markets. This is not to say that LIBOR could not be manipulated: if anything,
we should be amazed that ... keep reading

Sunday, July 22, 2012

Just as one drop of blood (real or imagined) made
Elizabeth Warren a Cherokee for a while, she also believes that receiving $1 of
benefit from government spending makes each of us a child of government
forever. Last fall, at the beginning of her senatorial campaign (challenging
Sen. Scott Brown in Massachusetts), she pooh-poohed charges of “class warfare”
by assuring a group of supporters: “There is nobody in this country who got
rich on his own — nobody.”

Sound familiar? President Barack Obama seemed at
the time to be sharing the same scriptwriter and, in case we forgot, last
weekend he reminded us: “If you’ve got a business — you didn’t build that.
Somebody else made that happen.”

An unduly charitable interpretation of these words
would take it that the president and Ms. Warren have noticed that most of life,
including commerce, consists of interaction and cooperation with other people.
Were that construal correct, then their words would not attract comment. But that
is not what they meant. They were not talking about trade among free
individuals but the obligation of the individual to the collectivity, the
state.

Ms. Warren was more subtle than the president:
“You built a factory out there? Good for you. … You moved your goods to market
on the roads the rest of us paid for. You hired workers the rest of us paid to
educate. You were safe in your factory because of police forces and fire forces
that the rest of us paid for. You didn’t have to worry that marauding bands
would come and seize everything at your factory — and hire someone to protect
against this — because of the work the rest of us did.”

Notice that she portrays you, the individual, as a
free-rider on the back of the collective. What a conservative would recognize
immediately as the fruit of free cooperation in a culture that has prospered
and survived the test of time, a socialist sees as gifts from the essential
nanny state with an open-ended mandate to comfort and to protect us from our
ignorance and our natural leaning toward social disorder.

Notice also that government is not essential for
the provision of any of the services that Ms. Warren mentions. That we choose
to supply such services through government reflects our preferences and
judgment on costs.

I once worked for a company that built and
maintained the public roads around its factories. Home schools outperform
government schools. But government schools, when locally funded and controlled,
outperformed those influenced by federal bureaucrats and union rules. Private
fire protection has always been feasible, and not even in a police state would
government have a monopoly over your personal security.

Ms. Warren lectures us: “Now, look, you built a
factory and it turned into something terrific, or a great idea. God bless —
keep a big hunk of it. But part of the underlying social contract is you take a
hunk of that and pay forward for the next kid who comes along.”

While we appreciate that Ms. Warren might allow us
to keep some of what we produce, we should remind her that nowhere in the U.S.
Constitution is there any mention of a “social contract.” We have never needed
a government or any other waster of capital to tell us how to provide for the
next generation. It’s in our blood.

Sunday, July 15, 2012

The key to understanding the
Patient Protection and Affordable Care Act (PPACA) is not whether the provision
formerly known as the “individual mandate” is now a penalty or a tax but what
burden it imposes. The act’s remaining political support depends on a failure
to recognize the incidence and magnitude of the total burden imposed on people
by the whole act.

From the beginning, support for
federal government intrusion into medical care depended on the belief that we
could get something for nothing. The reigning mythology is that “health care is
different” and that a government bureaucracy can and must protect us from that
multitude of professionals and “evil corporations” that offer medical-related
products and services. Not understood is that the same freedom to trade and
enter into contracts that has yielded fine service and rapid innovation in
other sectors would work no less well for health care.

When Supreme Court Chief Justice
John Roberts transformed the individual mandate penalty into a tax, he did
eliminate one minor burden. Those who choose not to comply with the
specifications of the mandate will no longer be lawbreakers: they merely give
up their exemption from the tax. But the cost of this small gain (and
elimination of the Medicaid mandate, which would have extorted billions from
the states and their taxpayers) was that the PPACA, with its other burdens,
would stand.

Although it appeared that Roberts
had placed limits on the federal government’s Commerce Clause regulatory
powers, he allowed the government to achieve much the same effect through
taxation. University of Chicago law professor Richard Epstein pointed out that
the Supreme Court had long understood that “taxation and regulation are close
substitutes, so a limitation on one power matters little if the other power is
still available.” He insisted that Roberts was wrong and that “the power to
regulate commerce and the power to tax should not be separated.”

This lost opportunity for
constitutional fidelity will bear on our future just as the burdens of
defective past decisions bear upon us now. Epstein would draw our attention to
the constitutional language that gives Congress the power to “lay and collect
Taxes” only in order “to pay the Debts and provide for the common Defence and
general Welfare of the United States.” Adherence to the original meaning would
rule out taxation for the purpose of redistributing income among citizens as is
now mandated under the PPACA. Such a reading would also have protected us from
most of the other federal transfer-payment programs that now threaten our
solvency.

The PPACA is expected to add
several billion dollars per year to our debt problem. Management of the
“insurance exchanges” alone will require over $60 billion per year in
subsidies. The act imposes a cluster of new taxes, but the biggest burden will
be borne by those who must comply with all the new regulatory provisions. That
includes patients and customers, whether they know it or not.

Passage of the act in 2010 put
the Department of Health and Human Services, the Internal Revenue Service, and
a multitude of other agencies to work writing volumes of new regulations. News
reports claim that at least 13,000 pages of regulations have already been
drafted.

Who could believe that this
imminent flood of regulatory pollution will contribute to the “general
Welfare”? For those who believe that our medical system is a mess, the PPACA is
an example of why.

Sunday, July 08, 2012

Although the Affordable Care Act contains many new
taxes that will soon come into effect, most recent attention has been focused
on whether or not the individual mandate provision within the act constitutes a
tax.

The Supreme Court has recently ruled, in NFIB v. Sebelius, that what the legislation
calls a “penalty” can be construed for constitutional purposes to be a tax. This
leaves open the question of what kind of tax it is. The closest that the court
came to a clear statement was that it was a tax on “not obtaining health
insurance.” But this appears to tax inactivity, which suggests that it contains
the same defect as the use of Commerce Clause powers to regulate inactivity.

To overcome this objection, the court insists that
“the Constitution does not guarantee that individuals may avoid taxation
through inactivity.” But the first and only example it gives is that of a capitation,
a head tax “that everyone must pay simply for existing.” Congress may impose
such a tax, but it is a direct tax, which means that its revenues must be
proportionate among the states according to population.

Since the first administration, revenue-hungry
governments have attempted to narrow the definition of “direct tax.” But the
current court is incorrect to claim that when the Constitution was written “it
was unclear what else, other than a capitation,” might be a direct tax. The
definition clearly included accumulated property, which is why, when Congress
passed a tax on ownership of carriages, James Madison objected that it was an
unapportioned direct tax. In citing that case, Hylton v. United States, the current court noted that the tax was upheld
by “reasoning that apportioning such a tax would make little sense, because it
would have required taxing carriage owners at dramatically different rates
depending on how many carriages were in their home state.” Rather than accept
this as an example of narrowness or ambiguity of the definition of “direct
tax,” the court should have rejected it as an example of expediency that
subordinated the demands of the Constitution to the desire for revenue.

Perhaps expediency motivated the current court to
reinterpret the individual mandate penalty as a tax. But it skated over what is
being taxed. Imposing a tax for “not obtaining health insurance” implies,
somehow, that having health insurance is the state of nature and that the
taxable action or commodity is its negative.

To tax inactivity and pretend that it’s an
indirect tax makes no more sense than the “regulation of inactivity,” which the
court has now limited. The individual mandate’s penalty might best be described
as a head tax with full exemptions for those who meet the minimum insurance
coverage requirement and full or partial exemptions for those with incomes
below defined levels. Even with the exemptions, the burden of the tax that
remains falls directly on those persons who were the targets of the penalty. It
is also unapportioned.

A head tax is a direct tax. That the court failed
to demonstrate the constitutionality of its newly discovered tax is clearly
recognized by the dissenting justices. They write: “The holding that the
individual mandate is a tax raises a difficult constitutional question (what is
a direct tax?) that the court resolves with inadequate deliberation.”

But if the court is guilty of expediency, the
dissenting justices were too polite.

Sunday, July 01, 2012

The good thing about
reading bad judicial decisions is that they get better toward the end. The bad
thing is that the ending, the dissent, doesn’t count — though it might be used
by future judges to help them think more clearly about how the law really
should be understood.

Such describes last week’s U.S. Supreme Court decision in the case
of National Federation of Independent Business v. Sebelius, which served to
uphold the 2010 health-care reform with the Orwellian name, the Patient
Protection and Affordable Care Act.

On the eve of the decision, most observers thought it obvious that
part or the entirety of the act would be found incompatible with the
Constitution. As it turned out, four of the justices concluded that the act
“exceeds federal power both in mandating the purchase of health insurance and
in denying nonconsenting States all Medicaid funding. These parts of the Act
are central to its design and operation, and all the Act’s other provisions
would not have been enacted without them. In our view, it must follow that the
entire statute is inoperative.”

To these dissenting justices, an act of Congress that is
incompatible with the supreme law of the land is not legal and cannot be
enforced in a court of law. Against the majority holding, they wrote that the
“values that should have determined our course today are caution, minimalism,
and the understanding that the Federal Government is one of limited powers.”

Just as the Constitution limits the powers of Congress, it limits
the powers of the Supreme Court. The dissenting justices made the point that
their duty is to determine what the law is now, not what it should be in the
future. Determining law for the future is Congress’ job; if it doesn’t do its
job, no other branch can bail it out.

Five justices, Chief Justice John Roberts and the four in dissent,
recognized that the Commerce Clause, which gives Congress the power to regulate
interstate commerce, could not be used to save the act’s individual mandate
provision. But Roberts decided to judge the provision not as a
mandate-with-penalty, which is how Congress actually framed it, but rather as
how Congress could have framed it, as a tax.

In this decision, Roberts, who wrote the majority opinion, acted a
bit like a parent who does his child’s homework for him. The child can run wild
and never learn anything, but how is the teacher to recognize and correct the
problem before the final exam? The child gets credit for something that he
never did, and the consequences don’t show up until later. What is the moral
lesson?

In order to market and pass the act, the president and the
congressional majority insisted that the mandate was not a tax. It would not
have passed otherwise. But now, for constitutional purposes, it is suddenly
claimed to be “independently authorized by Congress’ taxing power.” Perhaps,
like the spoiled child, they learned this from history: Social Security was
also marketed and then constitutionally defended using such chameleon tactics.

As the dissent points out, the court has decided “to save a statute
Congress did not write.” Why should we care? “The fragmentation of power
produced by the structure of our Government is central to liberty, and when we
destroy it, we place liberty at peril.”

Sunday, June 24, 2012

The mayor of a major Southeastern city recently asked for and got a substantial increase in property tax rates. The hoped-for revenue from the tax increase implies a transfer of $100 million from taxpayers to the local government. The mobilization of substantial public opposition to the tax increase tells us that many taxpayers felt that they could better use that money themselves and that the city government should make better use of the money that it already receives. But a majority of council members saw things differently.

None of this is unusual. Different people are guided by different standards, and they also perceive costs differently. In this case, the relevant costs were those perceived by the city officials. They responded to the incentives that they face. Their decisions suggest that they imagine the world, or at least the city, being made better by redistributing the use of funds from individual taxpayers to the collective purposes of the municipality. That is what councils do.

In the public pitch for the tax-rate increase, supporters repeatedly emphasized that it was “the first property-tax hike in seven years,” as if that was somehow important for other than merely historical interest. It seemed to imply that a tax increase was overdue.

But if, after seven years, a tax increase is overdue, does it follow that another tax-rate increase will be due within seven years, and so on? The assumption seems to be that government spending should grow faster than the tax base and is therefore naturally entitled to an increasing share of that tax base.

This is just a local example of the general confusion over the difference between tax revenues and tax rates when speaking of “tax increases.” In a world with price inflation, the cost of government can be expected to rise with the general price level. For a given tax rate, property-tax revenues can be expected to rise as the assessed values of local properties rise.

But there is no natural guarantee or even a likelihood that all prices will increase uniformly. A real-estate bubble would inflate not only current property-tax revenues but also expectations of future revenues. Any official plans made on the basis of those inflated expectations can be expected to lead to disappointment and, in turn, to calls for tax-rate increases.

As is true at all levels of government, those who expect to benefit disproportionately from government spending are more likely to favor the tax-rate increases that they believe will enable the spending increases. They are also more likely to lobby and work for the tax increase.

The $100 million given up by taxpayers will not be spent on private education, on private security, on private medical care, on private transportation or invested in private pensions. These are some of the costs borne by those taxpayers who protest against the tax increases. But mayors and council members, just like presidents, senators and representatives, often face a different calculus — a calculus backed by compulsion. Re-election has its own incentives.

Special interests often find common cause with ideological statists, both of which promote the expansion of government and the redistribution of resources toward their own purposes. One group does it by accident; the other does it on purpose.

This is why, in the absence of effective constitutional limits, governments tend to grow to test the economic limits and patience of their hosts.

Sunday, June 17, 2012

When unemployment rates are high, it is not difficult to find the real
reasons. Once in a blue moon, we might have no other explanation than that it
was a perfect storm of random events, such as technological breakthroughs or
social transitions. But in a free society there is no enforced barrier to each
person’s adaptation to changing circumstances. In the face of entrepreneurial
innovation and energy, any such perfect storm would quickly disperse.

The key phrase here is “free society.” Societies with chronically high
unemployment tend to be those with governmentally induced disincentives to work
or hire. Only government has the systematic power to thwart our natural
proclivity to adapt and improve. Only government can subject all industries
simultaneously to the effects of its macro policies, such as rising or falling
interest rates, the general burden of taxation, the moral hazard inherent in
the promise of bailouts, and the uncertainty and perverse incentives of
open-ended regulatory programs.

Our most recently reported unemployment rate, at 8.2 percent, is higher than
historical data would lead us to expect this long after a recession. Real GDP
growth has also been lower than expected at only 1.9 percent during the first
quarter of 2012.

It is no help to describe the problem as “a lack of demand.” Individual
businessmen could be forgiven for believing that it is. Certainly each of their
business situations would be better if they had more buyers. But their
immediate problem is not some general lack of “aggregate demand.” Product
demand is not uniform across industries but rather reflects the changing
priorities of consumers and investors. Some businesses are suddenly faced with
the fact that fewer people want what they are selling at the price they are
asking.

Recessions occur because companies’ production plans have diverged from the
plans and expectations of their customers and investors. Somebody is going to
have to adapt; that means changing the product or changing how it’s produced or
changing its price. For some industries, it is just a matter of waiting — and
the freer the market, the shorter the wait.

This time, we seem to be waiting longer. We have a fiscal and regulatory
environment that has raised the cost and uncertainty of hiring workers while
inhibiting productivity improvements. Many health and safety regulations
increase costs and reduce flexibility without really improving health and
safety. Increased minimum wages price the least-productive workers out of jobs.
Increased and extended unemployment benefits reduce the cost of failing to find
a new job. The arbitrary powers of the National Labor Relations Board serve to
politicize industrial relations and to create antagonism where none need arise.
This is a recipe for unemployment.

Without capital and the tools and technology that it supports, workers are
not worth much. A tax and regulatory environment that punishes capital is an
environment that makes workers less productive. Less-productive workers are
lower-paid workers.

Investment capital comes from anyone who saves for the future. And if most
capital is saved or deployed by “millionaires and billionaires” then raising
tax rates on millionaires and billionaires is anti-labor just as surely as it
is anti-capital.

However well-intended, the heavy hand of government has driven up the costs
of medical care, education, energy, manufacturing, and employment. We have less
of all of these things because we hoped for too much from government.

Sunday, June 10, 2012

by Richard
J. GrantDuring much of the past four years, the conventional political
narrative seemed to assume that Newton's First Law of Motion applies to the
economy. The repeated insinuation was that, “An economy in recession will
remain in recession unless acted upon by the outside force of government.”

Such a belief on the part of the electorate serves well a
president who takes office near the end of a recession. Even if that new
president does nothing and manages not to create too much uncertainty, economic
activity will recover naturally. The new president would then be associated
with the recovery. But to be sure that political credit redounds to the
president, a few innocuous policy actions – call it “stimulus” – could be
enacted.

That is what President Barack Obama threw away. Instead of doing
as little harm as possible, or removing the already existing policies and
regulations that hinder economic activity, he expanded the power of government to
make demands on our economic lives. Taking advantage of Democratic Party
majorities in both houses of Congress, he pushed through the incomprehensibly
large health-care and financial policy reforms – neither of which will prove to
be better than innocuous.

Both of these reforms have created regulatory entities that are
self-replicating and open-ended. It is now far more difficult for businesses,
let alone individuals, to plan for the future. Although uncertainty is a
natural part of life, the size and scope of these new regulatory intrusions
will drain resources into compliance efforts and raise the cost of both medical
insurance and financial prudence.

We cannot even be sure what our tax rates will be next year. The
recent health-care reform imposes new taxes as well as other possible fines and
burdens, and the Obama administration is pressing for increases in at least
some of our income-tax rates. This is what makes the uncertainty of the Obama
era qualitatively different from that of better-performing previous
administrations.

Professor Robert Barro of Harvard University and Stanford's Hoover
Institution has compared recent economic growth rates to those of previous
administrations since World War II. He notes that current growth rates are
significantly below the long-term average of 3.1 percent and suggests that it
is not unreasonable to expect above-average growth during a recovery. GDP
growth has averaged only 2.4 percent during the last three years, and in the
first quarter of 2012 was only 1.8 percent. Mr. Barro concludes that this low
growth means that “the U.S. economy has actually been falling further and
further behind the normal trend. Therefore, it is not a recovery at all.”

To Barro, the recent recession and financial crisis is no excuse. He
notes that deeper recessions usually yield faster recoveries and, although real
estate crashes are associated with slower recoveries, current growth rates are
still well below what would be expected.

Barro believes that the Obama administration does not understand
the importance of individual incentives and that its policies have served to
raise the cost of work. Also, its Keynesian-style demand stimulus and attempts
at industrial policy have failed. Instead, he suggests, the government should “get
its fiscal house in order and make meaningful long-term reforms to entitlement
programs and the tax structure.”

This translates into a lower tax burden, a lower regulatory
burden, and greater clarity about future government policies. But the Obama administration
persists in taking us in the opposite direction.